Is China Inc. Corporate America's Enemy?

Just because China will not collapse does not mean it will take over corporate America. Chinese corporations will continue to do what they do best: leverage colossal size to slowly but surely crawl up the value chain. Economies of scale, combined with a growing domestic market, will ensure that its price-value equation continues to outpace other countries' in the developing world. China does not want to be a sweatshop. A combination of affordable price and reliable performance explains why brands such as TCL (televisions), Huawei (telecom equipment), Haier (electronic appliances), and Midea (electronic appliances) are already reasonably well distributed in emerging markets such as India, Africa, Eastern Europe, and South America. Chinese corporations, most of them supported by the state, are already on the hunt to acquire foreign assets, including both resources and brands. On the manufacturing front, strengths in engineering and production, combined with downstream resource domination, will ensure no other nation supplants China as the world's factory.

The Chinese are (not) coming! It will be decades before Chinese corporations -- even in strategic industries such as renewable energy or information technology -- beat American, Western, and European companies on their own turf. Indeed, it may never happen at all. Indian companies have a better shot. Anyway, for the time being China is focusing energies on its expanding domestic market, a sensible strategy given its growth and price-conscious consumers. However, the single largest obstacle to the emergence of powerful Chinese brands is not tied to policy or preference. Put simply, the Chinese are great at dazzling application but lousy at innovation. Companies find themselves limited by: inefficient investment in research and development; limited shareholder rights; ineffective corporate governance; zero protection of intellectual capital; capital markets corrupted by political favoritism; and CEO "kings" whose focus is split between the bottom line and political imperatives.

The trust deficit. Then there is the national "trust deficit." China is a closed society and so are its corporations. The country lacks dynamic networks that stimulate new ideas and the dynamic collaboration required to harvest them. Columnist David Brooks, writing in November 2010 for The New York Times, puts his finger on an enduring American competitive advantage as a country of immigrants, a "crossroads nation." The United States boasts "permeable" global networks and has evolved to be a dynamic society with high social trust. American corporations, therefore, are more open and responsive to evolving market circumstances than Chinese enterprises. Brooks attributes this to China's enduring Confucian values and hierarchical social structure. He states, "Americans... challenge their parents and underlings are relatively free to challenge their bosses [rather than] submit to authority."

The Chinese, defensive and protective, are culturally and institutionally averse to ideas that buck against convention. Chinese CEOs surround themselves with yes men, allied by blood or geography. Within organizations, territorialism is rife. Sales managers vigilantly protect turf, minimizing cross-department teamwork. Resources are rarely pooled for innovation, leading to chronic short-termism and minimal investment in value-added products or brands. Subordinates, anxious about losing face, never counter senior managers, particularly on subjective matters impervious to proof. Deals with foreign joint venture partners are tortuously negotiated because a win-win mindset is never taken for granted.

Patents, not ideas. China's top-down modus operandi mobilizes resources to achieve economies of scale, an appropriate strategy for expanding into lower-tier cities. But imperial management is incompatible with creative expression, the latter a threat to established authority, hence China's woeful performance on the innovation front. Innovation is always incremental or feature-driven, never a breakthrough. Jared Psigoda, a 25-year-old American CEO of Reality Squared Games, an international online gaming publisher for Chinese titles, observes: "The vast majority of the games that come across our desk are shanzhai, fake with a twist. For most of them, they steal the codes, change a few pictures and change the title." Weibo tweaked the Twitter concept by enabling photo posting. Haier, the nation's largest appliance manufacturer, reconfigures conventional washing machines into infinite variations, including one that washes potatoes. Food manufacturers add novel ingredients to expand product range -- for example, Yinlu's peanut milk or eight-treasure congee. But the nation does not experiment with new models -- China's Apple is not in the incubation stage.

And what about services? China boasts computer networks to process e-transactions, call centers manned by automatons, and platoons of delivery boys on scooters. But its tertiary sector is rudimentary. For now, this is fine. Corporations deploy resources to succeed domestically -- there are roads to pave and airports to build. Low price, economies of scale, and armies of salesmen willing to tame a vast commercial landscape are the most powerful weapons on an expansive battleground. The West can continue to hone its own competitive advantages -- innovation, dynamic capital markets, creativity, and responsiveness to individual needs -- without fearing China.

This post is an excerpt from my forthcoming book, "What Chinese Want: Culture, Communism and China's Modern Consumer," to be published by Palgrave Macmillan in May, 2012.